Many limited company directors choose to take a low monthly salary and then receive large dividend payments from profits on a 3, 6 or 12 monthly basis.
This can be the most tax efficient way to operate but if you can’t survive until dividends are declared then as the director you may receive a loan advance, recorded in the Director’s Loan Account (DLA).
How to manage your DLA
We come across DLAs being used in all sorts of creative ways and not always to the benefit of the business (think shopping sprees at Selfridges!) We therefore thought it would be useful to publish a few things you should be aware of when taking money from your limited company:
- Repay the loan, this is not tax-free money!
- If the loan exceeds £5,000 then it must be treated as a taxable benefit, will need to be included on your personal tax return, possibly with extra tax to pay.
- If the loan balance is not fully repaid within 9 months of the company year end then the company will have to pay tax at 25% of the loan balance.
- HMRC are watching so manage your DLA carefully and remember that the money is not yours, it belongs to the company!
You need to withdraw money to meet day-to-day living costs before dividends have been calculated. Let’s say you borrow £1,000 in April and £1,000 May. In June you declare a £5,000 dividend, from this you clear the DLA and make a payment from the business account to your personal account for the remaining £3,000. The DLA is no longer overdrawn and if you need to borrow more money later in the year you can do so without liability.
Remember if you need help then we provide a jargon-free friendly accounting service. Our monthly fees are very competitive at £100 +VAT per month and include unlimited telephone and email support, free Xero accounting software, as well as all the expected accounting duties.